> Posted by Anita Gardeva
Word of the Week – Affordability: Describes products for which the price is in line with the client’s ability to pay for them. A characteristic of quality financial services.
Affordability is considered one of the greatest barriers to access to financial services. Affordability pertains to the costs associated with using services, including both interest rates and fees. The term emphasizes a threshold (e.g. an “affordable” loan interest rate ), but as a broad concept it relates to products that provide a positive value for service. It is often thought of only in terms of credit, but as a broader concept (value for service) it also applies to savings, insurance and payments. For example, if the rate of return on savings is lower than inflation, the savings account does not retain the real value of the client’s savings.
Spotlight Fact: We have found that in Mexico the average real annual net return on savings accounts is -3.5% for popular sector savings accounts and -2.8% for commercial savings accounts, making it impractical for the average Mexican to deposit money in most banks.
Affordability has become a center-stage topic for the microfinance industry in recent times in the form of an ongoing debate about microfinance interest rates. We have provided some resources below that explore this complex topic:
- Are Microfinance Interest Rates Excessive? (CGAP, February 2009)
- Banks Making Big Profits from Tiny Loans (Neil MacFarquhar, New York Times, April 13, 2010)
- Why are Microfinance Interest Rates so High? (Elisabeth Rhyne, Huffington Post, May 28, 2010)
For more financial inclusion terms, visit the Center’s interactive Financial Inclusion Glossary.
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